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An Examination of Real Interest Rates in the United States, Canada, France, and Germany during the Recent Floating Exchange Rate Period

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  • Patel, Ajay
  • Akella, Srinivas R

Abstract

This study reexamines the international linkage of ex-ante real interest rates using the theory of cointegrated processes. The univariate unit root tests suggest the existence of a nonstationary real interest rate in the United States, Canada, and (the former) West Germany. An ex-ante real interest rate is obtained by subtracting estimates of inflation from the nominal interest rate. The expected inflation rates are obtained by modeling changes in monthly CPI values as autoregressive moving average (ARMA) processes. A multivariate test for unit roots indicates that there are two cointegrating vectors, or one common stochastic trend, for the system of three nonstationary real interest rates. In addition, the log-likelihood ratio test fails to reject the null hypothesis that, in the long run, real interest rates in the United States are equal to those in Canada and West Germany. Copyright 1996 by Kluwer Academic Publishers

Suggested Citation

  • Patel, Ajay & Akella, Srinivas R, 1996. "An Examination of Real Interest Rates in the United States, Canada, France, and Germany during the Recent Floating Exchange Rate Period," Review of Quantitative Finance and Accounting, Springer, vol. 6(3), pages 277-292, May.
    • Handle: RePEc:kap:rqfnac:v:6:y:1996:i:3:p:277-92
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    Cited by:

    1. Unknown, 1998. "Commodity Costs and Returns Estimation Handbook (entire book-condensed file)," Commodity Costs and Returns Estimation Handbook,, Iowa State University.
    2. Costantini, Mauro & Lupi, Claudio, 2007. "An analysis of inflation and interest rates. New panel unit root results in the presence of structural breaks," Economics Letters, Elsevier, vol. 95(3), pages 408-414, June.
    3. Unknown, 1998. "References/Literature Cited," Commodity Costs and Returns Estimation Handbook,, Iowa State University.
    4. Keshab Shrestha & Kok Tan, 2005. "Real Interest Rate Parity: Long-Run and Short-Run Analysis Using Wavelets," Review of Quantitative Finance and Accounting, Springer, vol. 25(2), pages 139-157, September.
    5. Christian Hertrich, 2013. "Asset Allocation Considerations for Pension Insurance Funds," Springer Books, Springer, edition 127, number 978-3-658-02167-2, February.

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